Hand to mouth

Published at 10:30 2 Mar 2018 by . Last edited 15:12 5 Nov 2018.

LPG markets are anticipating the bottoming out of US stockdraws, but with uncomfortably low inventories and positioning heavily skewed towards the short side of the market, the risk of further volatility will persist. Not only are many traders active on the short side, but many consumers are trying to hold off on buying so demand-side weakness outside of the US is palpable. Despite this week’s cold snap in Europe and robust petrochemical markets, buying has been sluggish because buyers do not want any excess inventory. It is similar in Asia, where Japan and South Korea have restocked already and China and India are taking a break from buying.

The US market meanwhile has been roiled by production growth shortfalls. Output fell m/m in December and January due to freeze-offs in several parts of the country, resulting in field production of LPG falling (by 21 thousand b/d) for the first time since August 2017 in December. The declines in January were likely even bigger, perhaps around 70 thousand b/d m/m. But the production story moved back into growth mode last month, with our short-term output model predicting a m/m rise in oil production of 0.2 mb/d, which would take gas plant LPG production in February up to the second-highest level on record and more growth expected this year.

The rapid recovery in US propane production in February helps explain the moderation of the pace of US stockdraws even as exports held above 1 mb/d. But even so, inventories ended the month near 20 days of supply when adjusted for export levels. There is plenty of talk of export cargoes being cancelled, but stocks will still probably continue to draw through at least mid-April, so the days-of-cover measures are going to get tighter still. Thus, even with relatively modest international demand the US can still put up some surprises if there is short covering.

Elsewhere, supply is also growing. Middle Eastern exports were weak in January due to outages in the UAE, where the Habshan 5 gas plant was tied in, but shipments rebounded strongly in February according to preliminary data. UAE output should rise this year, as it will in Kuwait, Saudi Arabia and Iran. As for exports, waterborne LPG volumes from Russia and Australia are also on the rise.

With global supply climbing sharply, the market needs demand to join in. Petrochemical switching in Europe could add up to 0.1 mb/d of LPG demand this year, but the developed world can only absorb so much LPG, especially with cracker maintenance season coming soon. Chinese demand should perform while global economic growth booms and with PDH start-ups due towards year-end, though China’s environmental agenda poses intermittent downside risk so buying may be lumpy. We have already seen this pattern with India, where infrastructure limits are forcing importers to try and delay purchases.

Going forward, the market will need to keep an eye on infrastructure constraints in the Permian basin in the US as well, as oil and gas production is rapidly approaching takeaway capacity limits. We expect oil producers to have to flare gas this summer to sustain growth rates. Even so, with US LPG production surging, exports and domestic demand must grow for the market to stay in balance. Sustained discounts to oil will be needed to open up new markets in the medium term as well as drive the expansion of infrastructure.

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